Core views:

Zhimingda is the core private enterprise of military embedded computer, and its downstream products cover the four application fields of airborne, missile-borne, carrier-borne and vehicle-borne, entering the fast track of development. With strong R&D and management capabilities, the Company is well-poised to fully benefit from strong downstream demand of aerospace and the spillover of supporting demand within the system. Meanwhile, the expansion of production and the deployment in high-speed and high-precision analog-to-digital converter (ADC) chips will likely open up the long-term growth space. We initiate coverage with a target price of Rmm170 on 45x 2023E PE and a "BUY" rating.

Abstract:

Core private enterprise of military embedded computer on a fast-growing track.

Zhimingda is a core private enterprise of military embedded computer, and has participated in the R&D and production of a number of national key military equipment models. The downstream products cover four major areas of airborne, missile-borne, carrier-borne and vehicle-borne, including signal processing, data processing, interface control, large capacity storage and other four functions. The Company’s airborne business is the main contributor to the gross profit and revenue and the bomb embedded business presents high elasticity. Benefiting from the accelerated deployment of aerospace equipment and the rapid development of informatization construction, and the increased percentage of business outsourced by the state-owned research institutions to private enterprises, the Company's revenue has been rising rapidly in recent years, with revenue and earnings CAGR reaching 27.4% and 47.1%, respectively in 2017-21, ushering in a golden development period.

Multi-domain drives up demand, and private enterprises benefit from the trend of outsourcing.

The embedded computer is a core component in the middle and upper reaches of the military electronics industry chain, and serving as the "Brain" of the weapons system, it accomplishes all kinds of military tasks, such as reconnaissance, communication, confrontation, search, identification, aiming, attack and so on, and is widely used in all kinds of weapons and equipment, such as aircraft, missiles, ships, tanks and so on. China is in the stage of accelerated output increase of weapon equipment, with rapidly increasing downstream demand from military aircraft and missiles, as well as considerable demand from ships, vehicles and other fields. We estimate that the size of the military embedded computer market in 2020 was about Rmb30bn and the market is likely to enter a stage of rapid development during the "14th Five-Year Plan" period (2021-25). For a long time, embedded computer in each subdivision field is dominated by computers within the corresponding groups, and with the reform of the military equipment supporting system, the downstream institutions of systems and sub-systems have focused on the core embedded computers, and the trend of outsourcing is obvious. Under the uptrend of industry development and the continuous promotion of building small core and wide cooperation (i.e. to make the crucial technology and design as the mainstay of the military high-tech enterprise groups while the general support and processing to be based on the whole society), private enterprises are embracing golden development opportunities.

Dual drivers from airborne and missile-borne products, enhanced by R&D and management.

The Company is a long-term supplier of supporting airborne devices, and a core beneficiary of the increasing batch production of the main fighter models and a number of finalized missile models, thus its missile-borne business has high elasticity. Under the two-wheel-drive of aerospace and aviation, the Company has ample backlog orders, that amounted to about Rmb610mn by the end of 3Q22, or 177% of revenue during the period, which implies high earnings visibility. It continues high R&D investment, with the establishment of efficient R&D system, optimized supply chain and quality management, and promotes the construction of long-term incentive mechanism through equity incentives. Under the guarantee of R&D capability and management capability, the Company will benefit from the demand spillover in the institutions within the system. The Company’s investment in production expansion to strengthen the foundation for long-term development. It entered into the ADC chip area by increasing the investment in relevant company, opening up a new space for growth. The Company has strong software development capabilities and presents strong competitiveness in the trend of hardware and software separation under "hardware standardization + software functionalization".

Potential risks: Less-than-expected demand for weapons and equipment; weakened cooperation demand from research institutions; the risk of raw material procurement; increased raw material prices; insufficient technology development capacity; unsteady order numbers and volume.

Investment strategy: Benefiting from the ramp-up of aerospace weapons and equipment, the military embedded computer sector may usher in fast growth. Under the trend of cooperation with institutions, private enterprises in the industry ushers in a golden development opportunity. As a core supplier of military embedded computer, Mingzhida is likely to benefit from increased downstream demand and cooperation trend by virtue of its long-term experience to provide product-matching solution and outstanding R&D and management capability. Meanwhile, the ADC chip and other products are likely to fuel new growth headroom. We forecast attributable net profit (ANP) to be Rmb120mn/190mn/ 260mn in 2022E/23E/24E, corresponding to EPS of Rmb2.31/3.77/5.07 and 56x/35x/26x 2022/23/24E PE at current price. We selected Jingjia Microelectronics (300474.SZ), Corpro Technology (300101.SZ), C*Core Technology (688262.SH) as comparable companies. Based on the average valuation of 45x 2023E PE and 1.14x 2023E PEG (Wind consensus estimates) for the above-mentioned companies, we give 45x 2023E PE by considering PE and PEG method comprehensively and derive a target market cap of Rmb8.5bn (corresponding to 0.93x 2023E PEG) and a target price of Rmb170. Initiate coverage with a "BUY" rating.